Proceedings of the AABEA Biennial Convention, October 12th, 2002, Washington DC, USA

Review of the Tax System in Bangladesh A Prerequisite for Industrial Growth

T. A. M. Nurul Basher*
E-mail: nurul-basher@betelco.com

Abstract - This paper has been written to highlight the sustainable industrial growth problems being faced by the entrepreneurs in Bangladesh. There are multifarious problems for Industrial growth in Bangladesh but the major bottleneck is the adverse tax system. There exists no consideration for industrial raw materials import in so far as application of duties and taxes compared to those of finished consumer goods. The net result is increase in production cost which in turn makes the product noncompetitive. So as not to create an extra burden on industrial productions, the government needs to remove duties and taxes from imported raw materials as in many Middle Eastern countries and Thailand. The government implicitly accepts the adverse effects of the improper taxes on our industrial growth and has tried partially to alleviate some of these impediments by creating Export Processing Zones and Bonded Ware Houses; this paper explores the benefits doing away with these high import duties altogether. It also looks at the paybacks to the economy from industrial growth. Finally, the expansion of the income tax umbrella is considered and in particular its effects on growing a greater sense of national civic duty and its impact on the voting patterns of the electorate. [1]

to this, the average per-capita income of developed countries range around or exceed US$ 26,000 per year. While it is unthinkable to raise the income of a Bangladeshi to a level comparable to those of people in developed nations, one should make continued efforts towards attaining a minimum level of life sustenance that could be termed as economic solvency. Bangladesh covers an area of about 56,000 square miles most part of which is agricultural land. Although it has attained selfsufficiency in food it still has vast areas where there are scopes for production of adequate food and other agricultural items with export potential. However, whatever possible expansion it makes in agriculture it is not possible to reduce the unemployment to a reasonably acceptable level. Hence, Bangladesh needs to explore other avenues of job creation.

I - INTRODUCTION
Bangladesh has been independent for about 54 years. It gained independence first from the British Rule in 1947 and then again for the second time in 1971 from the Pakistani Military Junta. Since 1947 till date our population has increased from some 50 million to 130 million. In the mean time it has faced several famines, floods and cyclones, not to mention other kinds of losses. The economic situation has worsened day by day. Political independence failed to lead this country to the desired goal of economic independence. Throughout these long years extending more than half a century, Bangladesh has definitely made some serious mistakes that have resulted in its fiscal failure. However this paper is not intended to be a matter of criticism of the past failures, but rather a suggestion is being presented here through which Bangladesh might find a way to engage its vast population in productive employment. Figure 1 shows that even ten years ago, almost half of the country had a population density of between 1500 to 2000 people per square mile. With an annual growth rate of approximately 2% and therefore producing an additional 2.7 million people per year, Bangladesh now has a population of about 130 million. The per-capita income is somewhat like US$ 350 per year. Compared

* Bengal Telecommunications and Electric Corp. Pvt. Ltd. (BETELCO) 19 Kakrail Road, Dhaka - 1000, Bangladesh. 2002 BETELCO. All Rights Reserved.

Figure 1: A 1991 population density map of Bangladesh

Proceedings of the AABEA Biennial Convention, October 12th, 2002, Washington DC, USA One way is to get a sizable part of our population to immigrate to countries which are sparsely populated. But given the practical scenario of strict immigration laws of other countries which have abundant land in their possession with scanty human habitation, one has to look for the only other alternative. And that is industrialization. It is possible to reduce unemployment level by creating jobs in the industrial sectors. Therefore emphasis has to be placed on how Bangladesh can grow its industries so that it can engage its large unemployed population in a massive scale. In fact this matter should have been given due attention right from the start of the first political independence in 1947. Even though it is quite late by now, after 54 years Bangladeshis still should come to realize that massive industrial participation is of paramount importance for their countrys economic survival. 9. Miscellaneous (Mandatory bribe/bakshish to customs and port officials)

Since the customs duty varies from 5% to 37.5% of the value of the goods, the percentage of taxes paid at the port of entry varies anywhere from 30% to 80% of the total taxes due on an imported item depending on its type and the tariff structure. This is shown in Figure 2.

II IMPEDIMENTS TO INDUSTRIALIZATION If one seeks to identify the impediments to achieving the goal of industrialization, the following could be considered as the major bottlenecks: 1. 2. 3. 4. 5. 6. Adverse Tax System Inadequate Infrastructure Inadequate Power Supply Inadequate Telecom facilities Improper Law and Order Situation High Illiteracy Rates

Figure 2: Import taxes as a percentage of the total taxes paid on an imported item And again after production is completed there is VAT on the finished goods as well as regular annual income tax. In addition, there are also various types of Mastaan (gangster) Taxes, ranging anywhere from religious Mastaans to political ones, and they all have their eyes focused specifically on the industrialists. The Government needs to deal with this last kind of taxation through improvement of the law and order situation. Reverting back to the topic of taxes at the point of entry, the fact is that one has to pay import taxes ranging anywhere between 30% to 80%. By paying such high taxes, how can it be conceived by any sane person that the final product would be competitive? Although one may not achieve the same quality, one must always think that ones product must be comparatively cheaper in the global market; lesser in quality but cheaper in price would still capture a reasonable size of the market. Having one of the cheapest labor forces in the world available in Bangladesh, its product should be one of the cheapest in the world, if not the cheapest. But in practice this is not the case. Bangladesh has almost no product for sale in the world market except Ready Made Garments (RMG). Why is this so? The reason is the high taxes on raw materials. And because of these high taxes there has been negligible growth in the industrial sector in the last 54 years. In support of the above theory the case of the RMG industry can be cited as an example. This industry was nonexistent in Bangladesh. The only way this industry could be established and flourish to the level where it is now, being the number one export earning item, was due to the introduction of the bonded ware house system. In other words fabrics are being imported (as the raw materials for RMGs) without payment of any duty, tax or VAT. As a result, Bangladeshi RMGs have become highly competitive in the world market. So one can conclude that Bangladesh has recognized the fact that duties and taxes imposed

Most of the above subjects have been dealt with in numerous writings by many intelligent thinkers. However this paper will deal primarily with the Adverse Tax System. When it comes to manufacturing certain finished goods, the first thing one needs to estimate is the cost of production. First comes the cost of raw materials, then the others i.e. cost of labor, utilities, bank interest, amortization, overhead etc. Bangladesh being mostly an agro-based country, industrial raw materials are almost not available domestically. Therefore one is left with little or no option but to import raw materials for any and all kinds of industry one wishes to set up. An industrialist would definitely look around all over the globe as to where s/he can obtain the cheapest and the best quality raw materials.

III OVERBEARING BURDEN OF TAXES However an insurmountable barrier an industrialist finds is nowhere else than at the doorstep of Bangladesh when his/her goods are at the port of entry. These are subject to various types of taxes: 1. 2. 3. 4. 5. 6. 7. 8. PSI (Pre-shipment Inspection charge 1% of C&F value) Customs Duty Value Added Tax (VAT) assessed on duty paid value License Fee Advance Income Tax Surcharges Port Charges Clearance Charges by Clearing Agent

2002 BETELCO. All Rights Reserved.

Proceedings of the AABEA Biennial Convention, October 12th, 2002, Washington DC, USA at the port of entry is an unnecessary burden on its RMG industry, and therefore these have been eliminated. 3. 4. Opened up demands for fabrics thereby opening doors for development of textile industries. Created a consumer market by the day-to-day demand of RMG laborers, who otherwise were living a very poor life and consuming very little many were vagrants. Provided direct income tax revenue to the Government by the industrialists themselves and their higher-grade employees. This income tax earning was not previously available. Provided VAT through sale of consumer goods. All these additional consumptions did not exist before. RMGs themselves became consumers of service industries like electricity, gas, water and telephones thus prompting growth in these utility sectors.

IV EXPORT PROCESSING ZONES

AND THE

NEED TO ELIMINATE TAXES FROM RAW MARTERIALS

Let us consider the cases of establishment of Export Processing Zones (EPZ). The Bangladesh Government is now planning to open EPZs in almost all the greater districts, with a view to attract foreign investors. The salient principle of these EPZs again is to import raw materials without duties and taxes. In other words, the Government is convinced (recognizes) that imposition of taxes and duties at the point of import is a burden on industries and they are gradually removing these albeit in a rather piecemeal fashion. Then the question arises why in this piecemeal manner? Why not let the entire country be treated as an EPZ, by eliminating the need to pay taxes on the imported industrial raw materials. However, the Government may impose VAT on the goods to be sold within Bangladesh as consumer items and no tax imposed on goods to be sold out side. If this scheme is implemented, the growth of industries will be exponential. The strongest argument against this scheme is that Bangladesh Government will loose a huge amount of its revenue to the extent that it will not be able to run itself. But this argument is not tenable in practice. Let us revisit the RMGs case: can we say that because the Government is not receiving any revenue from the import of RMG fabrics, they are loosing revenue from the RMG sector? The answer is a definite, resounding no! Many Middle Eastern countries and Thailand have no taxes on imported raw materials. Thailands industrial growth started from the early 1980s and following the implementation of tax liberalization policies they have been extremely successful. An indicator of this success is the fact that their electricity consumption is some 30,000 Megawatts for a population of 60 million compared to only 3,000 Megawatts for a population of 130 million in the case of Bangladesh. The policies they follow are listed below: 1. Exemption of import duty and VAT on machineries, components and materials etc., imported for factory construction. Exemption of import duty and VAT on raw materials. Exemption of export duty and VAT on exported goods. Exemption or refund of duties and VAT for local goods utilized for production

5.

6. 7.

Its not difficult to calculate to what magnitude the income and taxes being generated will multiply just by lowering the government revenue only at one point namely import duties and taxes. Given this scenario can one not imagine that one can do wonders to the Bangladeshi economy provided the right steps are taken? By mass producing RMGs and growing this industry in last several years Bangladeshis have definitely developed their own technical, manufacturing and sales expertise in this sector. They have no reason to think that their national talents are limited within the realm of the RMG industry only. Indeed they can grow many other production sectors for consumer goods as well, such as engineering goods for the original equipment manufacturers (OEMs), once the products are made cheaper. This way not only can they drive out many imported items from their domestic consumer markets (which is quite large at US$130 million), but also they can penetrate into the foreign markets quite easily. The Bangladesh Government will not be required to assist the entrepreneurs to sell their goods outside. The industrialists themselves will be able to locate their own market. In a nutshell, the economy of the country will jump up to a reasonably high level whence it shall not have to ponder over finding ways and means for poverty alleviation. Simply put, Bangladeshis will no longer be poor. The government will be happy about the revenue they receive through direct income tax and VAT on consumer goods.

V EXPANSION OF THE INCOME TAX UMBRELLA

AND THE CIVIC RESPONSIBILITIES OF THE ELECTORATE

2. 3. 4.

As this paper is intended to suggest tax review, which does not only cover areas of tax removal, it also suggests the expansion of the horizon of income tax. The income tax umbrella should be broadened. As of now the tax ceiling is Tk. 75,000 per year lowered from Tk. 1,00,000 per year very recently. This should be brought down even further to Tk. 36,000 per year. The tax may be set quite low, but the number of taxpayers would increase, thereby increasing the total volume of revenue income. And again once the industrial growth is there, through import tax liberalization, the number of citizens engaged in productive jobs will increase many folds thereby increasing the number of taxpayers. It is well known that in developed countries

IV PAYBACK TO THE ECONOMY FROM INDUSTRIAL GROWTH

Let us now consider how the Bangladesh RMG industry has contributed to its national economy. The following come to mind immediately: 1. 2. Provided jobs for labor force directly related to the industry. Provided jobs to related/support industries.

2002 BETELCO. All Rights Reserved.

Proceedings of the AABEA Biennial Convention, October 12th, 2002, Washington DC, USA the income tax an employee pays is about 30% of his/her total annual income. There is another aspect of increasing the number of taxpayers. This will change the voting patterns in our national elections. As the situation prevails, most of our citizens do not pay direct income tax and therefore they do not feel very responsible at the time of voting. The result is that we get undesirable elements as our political leaders. Once people start to pay direct income taxes, they will think twice before voting any candidate into power. It will always come into the consideration of the voter as to what this candidate is going to do with the taxpayers money. As a result we can expect a responsible government being elected by a responsible electorate. IV - CONCLUSION The article recommends revision and total elimination of existing duties and taxes from imported raw materials, so that government does not create an extra burden on industrial productions. An established example of this success has been through the Ready Made Garments industries where all import duties and taxes are exempted from fabrics and associated materials required for RMG manufacturing (Bonded Warehouse system). Another example is the establishment of Export Processing Zones (EPZ) where raw materials are again exempt from duties and taxes. Therefore it is quite understandable that government accepts the fact that to make our industrial product competitive in the world market the raw materials must be duty and tax-free. The article thus argued as to why the entire country should not be treated as an EPZ where finished products can be taxed for the local market while abolishing taxes from goods destined for the export market as in many other countries such as Thailand. The Government should not run itself mostly on revenues from import duties, rather the tax umbrella should be widened to increase personal income tax. This would be possible only if the citizens are allowed to have reasonable income from which they are capable of paying the tax - by opening doors to job opportunities through industrial expansion. complete design. Before leaving the BTTB in 1977, Mr. Basher was the Director of Microwave. In late 1977 he moved to Riyadh, Saudi Arabia where he worked as the Chief Engineer at Beta Corporation from 1978 up-to 1983. Following that he was the Director of Engineering at MOSECO Telecom from 1983 to 1985. In 1985 he founded Marwan AlRashid International Contracting Establishment and served as its General Manager until 1994. In 1989, he successfully lobbied the Saudi Arabian Government to send an electronic telex exchange, valued at US$ 15 million, to the Bangladesh Government as a gift. He is the founder and the Managing Director of Bengal Telecommunication and Electric Corporation (Pvt.) Ltd. BETELCO. This company began its operations from Riyadh in 1986 and relocated its headquarters to Dhaka in 1994; the Saudi Arabian operation is still on-going. Currently BETELCO has two branches of activities: telecommunication and electrical power. The telecommunication division is primarily involved in contracting for telecom projects in both Bangladesh and abroad. The electrical division is focused on manufacturing a variety of products for the power distribution market including the PDB, DESA, REB as well as a long list of private clients for the Bangladeshi market. Mr. Bashar is also a founding member of the transformer manufacturers association in Bangladesh. Mr. Bashers other activities, in line with his inner craving for social responsibility, include: establishment of a middle school in Borishal, setting up a bookstore in Dhaka, pilot projects in fisheries farming and real estate development in collaboration with and benefiting those living in the rural areas of Borishal. As a lifetime member of Human Rights Bureau, he has also served as a general election observer in Bangladesh. He has published numerous papers and articles about Bangladesh on such diverse topics as democracy and election, student politics, water and soil management for flood control as well as issues concerning natural gas export.

T. A. M. Nurul Basher was born in Borishal, Bangladesh in January, 1941. He graduated in 1964 with a degree in Electrical Engineering from the Bangladesh University of Engineering and Technology (BUET). He started his engineering career in 1965 as an Assistant Engineer at Meher Industries of Dhaka, Bangladesh. Following that Mr. Basher joined the Bangladesh Telegraph and Telephone Board (BTTB) in 1966 where he worked for 11 years. There he also became the first microwave engineer in Bangladesh. After the war of liberation in 1972, he restored the entire countrys microwave network single handedly and was responsible for its

2002 BETELCO. All Rights Reserved.